Yuan Revaluation 2-Edged Sword for Korea

By Lee Hyo-sik
Staff Reporter

A time bomb is ticking: the yuan revaluation. The Chinese currency appreciation is looming larger with growing international pressure on the Chinese government. The problem is that the currency adjustment will come more as a threat to South Korea than an opportunity.

However, Seoul policymakers are sitting idle in dealing with possible negative fallout from the imminent strengthening of the Chinese yuan, merely commenting that they will increase the monitoring of the yuan's movement and its impact on the Korean won.

According to analysts, it is urgent for Korea to take all the preparatory steps necessary to make sure that a yuan revaluation does not undermine Korea's growth potential, as it is feared to spell more harm to the economy than good.

They said that a yuan revaluation will slow the world's third largest economy, affecting Korea's exports to China, the nation's largest export market. They added the revaluation will make the Chinese currency and other financial sectors more market friendly, but at the same time, more volatile, which could have repercussions for the domestic financial market.

They also warn that consumer prices here could go up sharply on rising import costs of China-made goods if the Chinese currency gains ground against the dollar, the won and other currencies.

In a short run, a stronger yuan will likely be a boon to local exports as Korean firms will be more price-competitive than their Chinese rivals across the globe. But in the mid-to-long run, the appreciation of the Chinese currency is expected to put an upward pressure on the value of the Korean won.

The yuan has been facing an upward pressure in line with China's continued robust growth over the past decade. The worldwide economic slump in 2009 even failed to derail the world's fastest growing economy. It has earned record amounts of dollars from international trade, sending its foreign exchange reserves to an all-time high.

Additionally, massive capital inflow, looking for more lucrative business opportunities in China, has added pressure to the yuan to rise in value.

Growing Pressure

The U.S., Europe and other countries that have run huge trade deficits for years have been criticizing China for keeping its currency artificially low in a bid to boost outbound shipments. They are calling China's large trade surplus a cause of the worsening global imbalance and that the world's fastest growing economy should boost the value of its money to import more from trading partners.

Washington has been urging Beijing to allow the yuan to freely float and its value to be determined by market fundamentals. The U.S. has even threatened to label the world's No. 3 economy as a currency manipulator, a designation that could impose new duties on Chinese products brought into the U.S. market. Some U.S. lawmakers demanded China revalue the yuan by as much as 40 percent.

But the Chinese government has been brushing such requests aside, insisting a revaluation would do little to reduce global trade imbalances. Chinese leaders have even insisted that if the yuan appreciates, the U.S. and other advanced countries would not be able to increase outbound shipments due to their high-cost structures, adding India and other emerging economies will fill the void left by China.

Moreover, China has been fiercely resisting growing international pressure for the yuan revaluation in order not to follow in Japan's footstep. After signing the Plaza Accord with four other major economies in 1985, Japan allowed the yen to strengthen against the dollar and other currencies to slash its exports.

But a stronger yen dampened Japan's economic growth and in a bid to revive the sagging economy, it kept the interest rate low, fueling asset bubbles. Several years later, the bubble burst, sending the once-world's second largest economy into a decade-long slump.

The yuan is not a convertible currency like the dollar, meaning it can't be bought or sold on the international market. China has kept its exchange rate within a tightly controlled range in recent years to ensure that Chinese goods sold overseas remain cheap. China essentially pegged its currency to the greenback in July 2008, allowing it to shift no more than 0.5 percent in either direction. Over recent years, the yuan has steadily gained ground on the dollar.

To combat rising inflation and patch uneasy relations with the U.S. and other trade partners, Chinese officials have begun hinting at gradually strengthening its currency against the dollar in the near future.

Gov' Sitting Back

``To curb inflationary pressure and defuse international protest directed at Beijing for protecting its exports with a weak currency, Chinese officials will let the yuan appreciate against the greenback at a gradual pace down the road. The consensus among analysts is that the Chinese currency will rise by 3 to 5 percent this year, but not by as much as the U.S. and Europe demand,'' said Yoon Deok-ryong, a senior research fellow at the Korea Institute for International Economic Policy.

Touching on the yuan's rise against the dollar and other currencies, Yoon commented that the Chinese currency will eventually gain ground against the won, boosting the price competitiveness of Korea-made goods in overseas markets. Additionally, a stronger yuan will make Korean products cheaper for Chinese consumers, boosting the nation's outbound shipments to the world's fastest growing economy.

``On the other hand, rising import prices of Chinese goods will raise consumer prices here. In the long run, a stronger yuan will put an upward pressure on the local currency. Additionally, China's more flexible currency policy will help liberalize its financial market, which will also elevate market volatilities,'' the economist stated.

A freer financial system in China will boost cooperation with Korea and other Asian countries and help establish the East Asian economic community, Yoon said. ``But at the same time, it will bring about greater financial market risks. Korea should brace for China-bound financial downside risks and take preemptive measures to mitigate potential negative fallout.''

But government officials here say there is not much to do to cope with the yuan's revaluation, stressing that they will enhance the monitoring of foreign exchange markets at home and abroad.

``We expect the won to gain ground against the dollar in line with the strengthening of the Chinese currency. If this moves the currency market excessively toward one direction, we then will take appropriate market stabilizing steps,'' said Kim Ik-joo, director general of international finance bureau at the Ministry of Strategy and Finance.